Franchise Legal Considerations
One of the most
important events in franchising is the introduction of the Franchise
Rule on October 21, 1979 by the Federal Trade Commission (FTC).
The FTC Franchise Rule requires all franchisors operating
anywhere in the U.S. to make full disclosure of the information that
a prospective franchisee needs in order to make a rational decision
about whether or not to invest.
In effect, the
rule obliges franchisors to meet certain FTC standards, such as
ensuring that a reasonable basis for any claims exists, that the
disclosure has been prepared in accordance with accepted accounting
principles, and that there is evidence to support the financial
claims, and that the franchisee, among others, can see this
the disclosure rule requires that the franchisor provide information
(a) The franchisor and its affiliates,
describing the business experience of each of its officers,
directors, and management personnel responsible for franchise
services, training, and other aspects of its
Any lawsuits or previous bankruptcies in which the franchisor, its
officers, directors, and management personnel have been
Initial franchise fees and other payments
required to obtain a franchise, and a description of continuing
payments to be made after the franchise opens.
Any restrictions on the quality of goods and services used by the
franchisee and where they may be purchased, including restrictions
requiring purchases to be made from the franchisor or its
Any assistance available from the franchisor or its affiliates in
financing the purchase of the franchise.
on the goods or services franchisees are allowed to sell and any
restrictions on the customers with whom they may
Any territorial protection to be granted the franchisee.
The conditions under which the franchise may be repurchased or refusal
renewal by the franchisor, transferred to a third party by the
franchisee, and terminated or modified by either
Any training programs provided to the franchisees.
Any involvement of any celebrity or public figures in the franchise.
Any assistance provided by the franchisor in selecting the site for the
The number of present franchises, franchises projected for the future,
franchises terminated or not to be renewed, and the number
repurchased in the past.
The financial statements of the franchisors.
The extent to which franchisees must personally participate in the
operation of the franchise.
The basis for any earnings claims made to the franchisee, including the
percentage of existing franchises that have achieved the results
(p) The names
and addresses of other franchisees.
must occur at the first contact with the franchisor, franchise
broker, or anyone who represents the franchise for sale, where the
subject of buying a franchise is discussed. The disclosure must be at
least ten business days before the signing of any franchise or
related contract or payment to the
Although the FTC
does not require registration from franchisor, several states do
have registration rules requiring franchise sellers to
register. Most states have adopted the Uniform Franchise Circular Offering (UFOC)
guidelines for their disclosure requirements, but as a potential
franchisee, do not assume that if a franchise is registered with the
state or provides some type of full disclosure document, you are
protected from the possibility of a failure or rip-off. You must use common sense
and do your research!
For more information about the Franchise Rule, please
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